Inside Mt Gox

The collapse of Mt Gox, the Japanese bitcoin exchange that’s one of the first, is almost unbelievable. (AP)

SummaryThe collapse of Mt Gox, the Japanese bitcoin exchange that’s one of the first, is almost unbelievable.

The collapse of Mt Gox, the Japanese bitcoin exchange that’s one of the first, is almost unbelievable. Close to half a billion dollars worth of bitcoins have gone missing, prompting Mt Gox to file for bankruptcy protection in Japan recently

What is Mt Gox

Mt Gox began as a market for trading cards used in the fantasy game Magic: The Gathering, but diversified in 2010 into an exchange for bitcoin, a little-known virtual currency launched a year earlier. Run by Frenchman Mark Karpeles, it became the dominant bitcoin exchange and at one point handled around 80 per cent of the world's bitcoin trade.

Why did Mt Gox file for bankruptcy

Mt Gox filed for bankruptcy protection in Tokyo District Court on February 28, saying it couldn’t account for 750,000 of its customers’ bitcoins and 100,000 of its own, roughly worth $474 million. The company also can’t account for $27.3 million in cash customer deposits.

The problem

A document circulating on the Internet that claims to have been prepared on behalf of Mt. Gox blamed the problem on a “malleability-related theft which went unnoticed for several years.” The document also says that the offline ‘cold storage’, where the bitcoins’ private keys or code are stored, “has been wiped out due to a leak in the hot wallet (the online part)". A Reuters report says that this suggests the vast majority of Mt. Gox’s bitcoin deposits were leaking out without anyone noticing.

The collapse

Mt Gox long had problems processing international transfers for people who wanted to cash out. On February 7, it halted withdrawals while investigating a security flaw regarding transaction malleability, an application which allows transaction IDs to be renamed.

Can the missing bitcoins be traced

Bitcoin transactions are recorded in a public ledger called the “blockchain”. But due to a lack of custom software tools to analyse the blockchain, tracing transactions is hard.

Will depositors get their money back

one class-action suit has been filed in the US and another planned in the UK. Mt Gox said that they “need to investigate a huge amount of transaction reports in order to establish the truth”. But these investigations could take a long time, and international lawsuits are unlikely to proceed quickly.

What does this mean for the future of bitcoins

Mt Gox’s viability has long been questioned by users. But the bitcoin community, stung by past thefts and frauds, is largely looking forward, saying it will have little impact on the